* Money manager Adam Smith testifies against former boss
* Tipped by Morgan Stanley banker -trial testimony
* Pressure to get "edge" in trades at Galleon, Smith says
(Updates with Smith testimony on "two torpedoes" strategy)
By Basil Katz
NEW YORK, March 29 A former portfolio manager
at Raj Rajaratnam's Galleon Group described pressure at the
hedge fund to get "an edge" in trading and said he gave inside
tips from a Morgan Stanley (MS.N) investment banker to his
The testimony on Tuesday of Adam Smith, the first former
Galleon employee to testify at the trial, provided a glimpse
into the inner workings of Rajaratnam's hedge fund.
Smith said he passed on confidential information to the
one-time billionaire, including periodic email updates written
in code on a pending merger he learned of from the banker.
Smith, 39, said he referred to the two companies,
Integrated Circuit Systems and Integrated Devices Technology,
in code as the "two eyes" to Rajaratnam. The deal was announced
in June 2005 and was valued at $1.7 billion at the time.
"I remember after the announcement having a sinking feeling
in my stomach that this may be a problem," he said on the
witness stand in Manhattan federal court in the biggest Wall
Street insider trading scandal trial in decades.
Sri Lankan-born Rajaratnam, 53, is accused of making $45
million in illicit profit between 2003 and 2009 on stock tips
from high-placed corporate insiders. He has vowed to clear his
name at his criminal trial, arguing his trades were based on
research or publicly available information.
Smith pleaded guilty in January and said he leaked details
about merger activity and earnings reports to Rajaratnam and
others at Galleon.
Smith was calm on the witness stand, leaning on an elbow
and chewing gum as he answered questions. He described everyday
operations at Galleon, including intense 8:30 a.m. meetings
He said combining a tidbit of confidential information on a
company with solid research on its sector was often called
"having two torpedoes in the water."
"If one of them misses, the other is likely to hit."
He said Kamal Ahmed, a Morgan Stanley banker in California,
tipped him about the pending merger of Integrated Circuit and
Integrated Devices in 2005.
About a year later, Smith had lunch with Ahmed at a Chinese
restaurant in Stanford, California, where the Morgan Stanley
banker leaked details of Advanced Micro Devices Inc's AMD.N
interest in buying ATI Technologies Inc. Immediately after the
lunch in May 2006, Smith said he passed the news of the pending
takeover to Rajaratnam.
No charges have been announced against Ahmed. Morgan
Stanley said in January that the banker had been put on leave.
Ahmed's lawyer, Douglas Tween, was not immediately
available for comment on Tuesday. Tween has said previously
that Ahmed was cooperating with Morgan Stanley in its
investigation and that he did nothing wrong.
Smith testified there was pressure at Galleon for "getting
an edge" -- extra pieces of information where a company's
results might differ from Wall Street expectations.
"Research is sort of doing your homework ahead of time,"
Smith said. "Getting the number is more like cheating on a test
... I knew the answer ahead of time."
Rajaratnam is accused of assembling a web of high-placed
contacts who provided him illicit stock tips. Prosecutors
contend that former Goldman Sachs Group Inc (GS.N) board member
Rajat Gupta, who has not been criminally charged, leaked
details about the bank to Rajaratnam.
Also on Tuesday, prosecutors introduced McKinsey & Co
consultancy phone records to show that Gupta, a former global
head of the elite management firm, called Rajaratnam seconds
after Goldman board meetings in 2008.
A McKinsey manager responsible for IT security testified
that Gupta dialed into Goldman Sachs board meetings on Sept.
23, 2008, and Oct. 23, 2008, from a conference room phone in
the consultancy's New York office. Gupta maintained an office,
email and phone at McKinsey after he retired in 2007.
"Our firm no longer has a professional relationship with
Rajat Gupta," a McKinsey spokesman said in a statement.
The case is USA v Raj Rajaratnam et al, U.S. District Court
for the Southern District of New York, No. 09-01184.
(Additional reporting by Grant McCool; writing by Martha
Graybow, editing by Matthew Lewis, Gerald E. McCormick, Gary